Now a fresh threat to growth and inflation – drought

It's official now - India is to face a drought this year. If, the situation gets worse, the economy has to prepare for further de-growth and a serious spike in inflation.

The agricultural sector which contributes as much as 16% to GDP, is likely to slow growth if output for the sector dwindles, which is most likely the case. India has already witnessed its slowest GDP growth rate in 9-years, of just 5.3% in the last quarter of 2011-2012.If a sector that contributes 16% to GDP slows, we can expect the economy to decelerate sharply.

The present drought is also likely to see rural spends reduce, pulling down growth further.

Apart from growth, there is likely to be a spike in inflation, as food inflation is likely to move up. Since, food inflation forms a significant part of the WPI, we are likely to see elevated levels of inflation, at least for the next few quarters.

Again, elevated levels of inflation means that the RBI is not likely to cut repo rates anytime soon, which means that industry can continue to be content with higher interest rates in the economy.

And of course, high interest rate means that economic growth rates in the economy are likely to slow. Clearly, poor monsoons are likely to pull down growth rates and drive inflation in the economy.

According to a Reuters reports, The India Meteorological Department (IMD) said rains over the entire June to September season were now expected to be less than 90 percent of long-term averages. How much it can impact, the next few quarters will tell.